Finding Direction in an Uncertain Policy Climate

Discussing investment themes is impossible without getting into U.S. politics: President Donald Trump’s election victory, the Republican majority in Congress, and what these developments could mean for the economy and markets. Many investors have benefited from the “Trump Rally” so far in 2017. But the new U.S. administration’s policies and the Federal Reserve’s (Fed) rate plans may work to pressure investments in the U.S. and around the world.

What to Know

Policy Changes Could Provide an Investment Boost, or Bust

Markets and investors are struggling to make sense of the gap between what’s been promised by the new administration and what will actually be delivered. Any one of these potential policy changes—if, and how, they are implemented—could have wide-ranging effects in the U.S. and around the globe, providing challenges when making short- and long-term investment decisions.Uncertain Uncertainty

  • Federal tax cuts
  • Increased fiscal and infrastructure spending
  • Health care reform
  • Government deregulation
  • Foreign policy and trade reforms
  • Immigration reform

The Fed Is No More Certain

Additionally, the Fed wants to normalize interest rates without upsetting the economy and financial markets, especially by the factors cited above.

The Federal Open Market Committee (FOMC) minutes show that the Fed has been using “uncertainty” and related words frequently over the last year, and the use of those words in meeting minutes has historically spiked before and during major market dislocations.

106

The number of times the Fed’s used the words “uncertain” or “uncertainty.”
FOMC meeting minutes in 2016 and so far in 2017: 7x (Mar. 2017); 14x (Jan.-Feb. 2017); 15x (Dec. 2016); 5x (Nov. 2016); 5x (Sept. 2016); 17x (Jul. 2016); 13x (June 2016); 4x (Apr. 2016); 2x (Mar. 2016); 24x (Jan. 2016).

What to Do

 Diversify, Diversify, Diversify

Whether the market has peaked or is still on the way up, we believe diversification is the best strategy for managing uncertainty. Actively rebalancing and limiting exposure to unintended risks can position portfolios for a wide range of outcomes.

Diversification can take various forms, and the approach you use depends on your goals and comfort level with making portfolio decisions.

  • Sophisticated Investors: Consider seeking sources of non-correlated returns. Major asset classes tend to move in tandem during market crises and could unravel diversification decisions.
  • Risk-Averse Investors or Small Balance Accounts: You can achieve diversification through solutions-based asset allocation products, such as target-date or target-risk portfolios.

Diversification does not assure a profit nor does it protect against loss of principal.

Focus on Secular Trends

Secular trends may present another opportunity. While cyclical stocks tend to move in response to the overall health of the economy, secular trends may prove to be more independent of economic and political direction. Active growth managers can zero-in on growth trends and exploit opportunities that exist, regardless of political climate. Examples include the steady shift from cash to credit card transactions, and companies’ increasing focus on digital advertising instead of print.

Who uses cash?

More than 60% of U.S. transactions were made with a credit card in 2016. Many countries still use paper currency, so rising standards of living and government initiatives represent a large secular growth opportunity.

Source: Credit Suisse. Data as of December 2016

63%

U.S. CREDIT CARD
TRANSACTIONS

Print vs. Digital

Companies are increasingly shifting their advertising expenditures from print to digital advertising – $180 billion dollars in 2016.

Source: Deutsche Bank. Data as of December 2016

$180b

2016 DIGITAL ADVERTISING
ANNUAL EXPENDITURES

In this challenging environment, we strongly believe in staying the course and focusing on fundamentals. Call us for more information on how this may affect you:

Diversification does not assure a profit, nor does it protect against loss of principal.

Rebalancing allows you to keep your asset allocation in line with your goals. It does not guarantee investment returns and does not eliminate risk.

The opinions expressed are those of Nancy Pilotte and are no guarantee of the future performance of any American Century Investments fund.

This information is for educational purposes only and is not intended as investment advice.